How to tell if the global economy is steaming ahead (or not)

“Investors continue to look for signs as to whether the global economy is recovering or not and one encouraging indicator is the relatively strong performance of transport stocks,” says Russ Mould, AJ Bell Investment Director. “America’s Dow Jones Transportation index can point to increases of 8% this year and 12% over the last 12 months as it approaches the 12,000 mark for the first time in its history.

Source: Refinitiv data

“It could be a good sign if the index, which contains 20 rail, trucking, logistics and airline stocks, were to keep powering higher, at least according to Richard Russell’s ‘Dow Theory.’ This argues that if the Dow Jones Transportation index is thriving then the better-known Dow Jones Industrials index should flourish too.

“The logic here is that it can only be good news if the share prices of the firms moving goods around the world by road, rail, sea or air are doing well. If something is sold, it has to be shipped. Conversely, weak transport stocks could mean unsold goods are piling up on shelves or in warehouses and in turn forcing cuts in production and shipments, with the ultimate result that companies cut back on jobs and investment to the detriment of wider economic activity.

“The Dow Jones Industrials is down by 1% in calendar 2020 and up by 5% over the last 12 months, so the Transports do seem to be leading the way.

“Sceptics will question how this can be, when the recovery from the deep downturn suffered in the first half of 2020 still feels so fragile. The latest updates from Cass Freight Index, which measures monthly freight activity in North America, do not seem to offer much by way of immediate encouragement.

“September’s reading showed a 1.8% drop in shipment volumes on a year-on-year basis. This is the twenty-second consecutive month to show a year-on-year drop and the index actually peaked back in May 2018, as if to imply the US economy was already in trouble even before the pandemic hit home.

Source: Cass, FRED - St. Louis Federal Reserve database

“Yet the CASS analysis reads in a much more upbeat fashion. That 1.8% year-on-year drop is the lowest rate of decline since March 2019 and the index is now 28% higher than its April trough. Moreover, notes CASS, “we see [the index] staying strong through year-end, as inventories remain relatively lean, and we expect freight to keep moving.”

“CASS flags improved consumer confidence, better business sentiment as companies re-open following spring’s lockdowns and also improved global trade flows. The final point seems to tally with data made available by the Port of Long Beach, America’s second-biggest port after that of neighbouring Los Angeles. Loaded container volumes, for import or export, grew for the third time in four months in August.

Source: Port of Long Beach

“This perspective also seems to tie in with the monthly World Trade Monitor published by the CPB Netherlands Bureau for Economic Policy Analysis. It too is showing improved momentum in trade flows, even allowing for the still-vexed nature of US-China trade relations and the Brexit talks between the UK and the EU.

Source: www.cpb.nl – World Trade Monitor

“A further source of news flow also backs up the case for transport stocks moving higher and that is Copenhagen-quoted AP Møller Maersk. It is the world’s largest container shipping company and therefore a fair proxy for global growth.

The Danish firm’s trading update (13 Oct) revealed that container volumes were down just 3% year-on-year compared to the 16% plunge witnessed in the second quarter and its shares responded favourably as they reached levels last seen in early 2017.

Source: Refinitiv data

“AP Møller Maersk also raised its earnings guidance for the year, although some of this was for company-specific reasons, such as cost efficiencies, lower fuel bills and higher freight rates.

“In addition volumes are still down year-on-year, just as they are in the CASS, Port of Long Beach and CPB data, so the global economy is far from out of trouble – the International Monetary Fund and World Bank would not have spent their October meetings crying out for more fiscal stimulus and Government spending otherwise. But at least investors can keep an eye on these data points as a quick guide as to whether the global economy is gathering or losing speed.”